BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 409 (Garrick) Hearing Date: June 17, 2009
As Amended: April 1, 2009
Fiscal: No
Urgency: No
SUMMARY Revises the California Insurance Guarantee Association
(CIGA) law to clarify that assessments to pay claims of
insolvent insurers shall be based upon a uniform percentage
applied to the share of direct written premium of participating
insurers for the base year, as that share is initially
determined from the insurers' first Annual Financial Statement
filing following the base year, and then as updated yearly from
subsequent annual Financial Statement filings. This method
conforms to that used since the program's 1982 inception.
DIGEST
Existing law
1. Protecting consumers from unpaid claims due to insolvent
insurers is a key purpose of insurance rate regulation; the
second line of defense protecting consumers against harm
from an insolvent insurer (i.e., nonpayment of valid claims)
is the guaranty fund system.
2. The California Insurance Guarantee Association (CIGA)
functions to provide insolvency insurance for its
participating insurers. Insolvency insurance is insurance
against loss due to the failure or inability of an insolvent
insurer to fulfill its obligations under insurance policies
it has issued.
3. All property and casualty insurers operating in California
are required to participate in the California Insurance
Guarantee Association as a condition of transacting
insurance in this state.
4. In the event of a participating insurer's insolvency, valid
AB 409, Page 2
claims against the insolvent insurer are settled by recourse
to the California Insurance Guarantee Association.
5. The Guarantee Association settles these claims by statutory
rules using the assets of the insolvent insurer plus funds
raised by assessing similar insurers for help in claims
payment, based upon whether the insolvent carrier wrote
personal lines coverage, commercial coverage, or workers'
compensation.
6. CIGA assessments are required to be based on a uniform
percentage applied to the net direct written premium of all
subject insurers for the prior calendar year. Net Direct
Written Premium is determined using data reported to the
Insurance Commissioner in each insurer's most recent filed
annual financial statement. The system was established to
allow for year-to-year adjustments in relative market share
so assessments rise and fall with market share.
This bill
1. Would amend the above law to specify that the initial
premium shall be adjusted by applying the same rate of
premium charge as initially used to each insurer's written
premium as shown on the annual statement for the second year
following the year "on" which the initial premium charge
"was based".
COMMENTS
1. Purpose of the bill The author's background materials state
"Section 1063.5 of the Insurance Code sets forth the process
by which the California Insurance Guarantee Association
calculates premium assessments on member insurers in the
event of an insolvency and the process the association uses
to "true up" each insurer's assessment to recognize the
actual amount of premium collected by the insurer in the
year subject to the assessment. Section 1063.5 contains
verbiage added in 1988 that makes it inconsistent with the
practice CIGA has used since its creation in 1982.
2. AB 409 would resolve this apparent drafting error and
conform the statute to the process CIGA has utilized since
its inception in accordance with its original statute.
AB 409, Page 3
3. The bill is sponsored by the California Insurance Guarantee
Association. (CIGA)
4. Background In the event of insolvency, CIGA imposes
post-insolvency assessments by applying a uniform percentage
to the net direct written premium of all subject insurers
for the prior calendar year. Net Direct Written Premium is
determined using data reported to the Insurance Commissioner
in each insurer's most recent filed annual financial
statement.
5. Annual Statement filings are due on or before March 1st of
each year and summarize operations from 1/1 to 12/31 of the
preceding Calendar Year.
6. A calendar year who's reported "Net Direct Written Premium"
forms the basis for an initial CIGA assessment can be
described as the assessment's "Base year".
7. CIGA's actual determination of an insurer's assessment is
based on the data for the Base Year as derived from the
latest Annual Financial Statements filed after the Base
Year. Consequently, initial CIGA assessments are made in
the year following the year in which the net direct written
premium was written.
A year "in which" an initial CIGA assessment "charge is
made" can thus be described as the "Base Year plus One".)
8. Current law, as amended in 1987, states that the initial
premium shall be adjusted by applying the original
percentage rate used for the assessment to each insurer's
written premium as shown on the annual statement for the
"second year following the year in which the initial premium
charge is made".
This "second year" following the year in which the original
premium charge is made describes a timing that can be
described as the "Base Year plus Three"
9. This bill will allow the adjustment timing to be that of the
"Base Year plus Two". This is consistent with the timing of
the CIGA law as originally adopted in 1982 and is consistent
as well with how it continues to be administered. The
change results in the allocation of insolvency claim costs
AB 409, Page 4
in a fair manner across all insurers transacting the type of
business involved in a particular insolvency.
10. Support . California Insurance Guarantee Association
(Sponsor)
11. Opposition None
12. Questions None
13. Suggested Amendments None
14. Prior Legislation Chapter 621, Statutes of 1982 and
Chapter 798, Statutes of 1988
POSITIONS
Support
California Insurance Guarantee Association (Sponsor)
Oppose
None
Consultant: Kenneth Cooley
(916) 651-4102